CHINA GREAT WALL AMC (INTERNATIONAL) HOLDINGS CO LTD v. ROYAL BOND INVESTMENT LTD AND OTHERS

HCMP 209, 210, 212 and 213/2020

[2021] HKCFI 2882

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NOS 209, 210, 212 AND 213 OF 2020

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BETWEEN

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J U D G M E N T

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A. INTRODUCTION

1.  There are 3 applications before the Court:

(1) The Plaintiff’s 4 consolidated originating summonses filed on 10 March 2020 under Order 88 of the Rules of the High Court (“RHC”) to recover possession of properties mortgaged by the Defendants (“O.88 Action”);

(2) The Defendants’ summonses filed on 16 December 2020 for filing evidence out of time in answer to the OS (“Time Summons”); and

(3) The Defendants’ summons filed on 6 May 2021 for an order that these proceedings do continue as if commenced by writ (“Conversion Summons”).

2.  Master Lai has adjourned the applications for hearing before a judge and required the Plaintiff, a licensed money lender, to explain whether it is necessary for the Plaintiff to comply with Order 83A of the RHC.

3.  At this hearing, the Plaintiff did not oppose the filing of the Defendants’ affirmations. I give leave to the Defendants to file out of time and the filing on 16 December 2020 shall stand; service is dispensed with. Accordingly, what remains to be dealt with is whether judgment should be given or there are issues to be tried which would require the filing of pleadings.

4.  There is no dispute that the Defendants have defaulted in payment of the loan advanced by the Plaintiff. The Defendants accept that the basic interest of 10% per annum and 12% per annum for default interest compounded in the Facility Agreement do not contravene section 24 of the Money Lenders Ordinance Cap 163 (“MLO”). However, they contend that the interest provisions do contravene the common law positions of unconscionability and/or penalty, which can be fact-sensitive. The Defendants suggest that the proceedings should be converted into a writ action.

5.  In the event the Court decides to give judgment against them, the Defendants ask for 4 months to deliver vacant possession.

6.  The issues are:

(1) Whether the Plaintiff was a money lender and hence have to comply with Order 83A?

(2) Whether the interest provisions are unconscionable?

(3) Whether the interest provisions are penalty in nature?

(4) Whether there are other reasons showing unconscionability and unreasonableness?

(5) What is the time frame for delivery up of vacant possession?

B. BACKGROUND

7.  On 24 April 2018 (“Utilisation Date”), the Defendants (“Companies”) as borrowers signed a Facility Agreement with the Plaintiff as lender whereby the Plaintiff would lend HK$90,000,000 to the Defendants jointly and severally as borrowers. Syed Sameeruddin Ahmed (“SSA”) signed on behalf of all the Defendants.

8.  The relevant terms of the Facility Agreement are as follows:

(1) The loan was repayable within 6 months of the Utilisation Date, which was subsequently extended to 12 months, ie by 24 April 2019.

(2) The interest rate was 10% per annum on the outstanding balance of the principal.

(3) The Interest Payment Date was specified as 29 June 2018, 28 September 2018, 31 December 2018, 29 March 2019 and 24 April 2019.

(4) In respect of any amount due and payable under the Facility Agreement (“Unpaid Sum”), default interest at the rate of 12% per annum on the Unpaid Sum shall be applied from the due date to the date of actual payment (both before and after judgment) and shall be immediately payable. Default interest (if unpaid) will be compounded with the Unpaid Sum at each Interest Payment Date applicable to that Unpaid Sum but will be immediately due and payable: Clause 8.3.

(5) The Plaintiff may issue a default notice pursuant to Clause 21.18 of the Facility Agreement, after which the Plaintiff may exercise the right of entry, take possession and sell the Properties: Clause 5.2.

9.  The loan was granted on the security of:

(1) 4 Mortgages executed by each of the Defendants over the 4 properties in Convention Plaza held in their respective names;

Registered owner	Unit No. in Convention Plaza	Person executing Mortgage
D1 – Royal Bond	4605	Paulina Pui Ki Luk of Uni Ouali
D2 – Dragon Capital	4604	Paulina Pui Ki Luk
D3 – Heaven Holdings	4506	Paulina Pui Ki Luk
D4 – New Vantage	4210	SSA & Syed Shaaz Ahmed

(2) Personal guarantees given by SSA, Syed Shaaz Ahmed (brother of SSA) and Madam Farah Serin Ahmed (sister of SSA).

10.  The Defendants made repayments of HK$6,108,985 up to 23 April 2019 for accrued interest and default interest.

11.  By a letter dated 13 June 2019 from the Plaintiff’s then solicitors, a Default Notice was issued to the Defendants, demanding them to repay the amounts due under the Facility Agreement.

12.  On 10 March 2020, the Plaintiffs issued the 4 originating summonses which were consolidated into the O.88 Action pursuant to the order of Master Lai dated 16 December 2020. The total outstanding as of 1 September 2021 was in the region of HK$122,000,000.

13.  Despite the various affirmations filed, the Defendants accept that the provisions of 10% interest and 12% default interest compounded as set out in the Facility Agreement do not contravene section 24 of MLO. They do not seek to re-open the Facility Agreement and Mortgages under MLO but they challenge the interests on the grounds of unconscionability and unreasonableness under common law/equity. They invite the Court to take into account the provisions of section 25(4) to (6) of MLO to decide whether the interest rates were unreasonable.

C. LEGAL PRINCIPLES APPLICABLE TO ORDER 88 ACTION

14.  Unlike Order 14 applications where the defendant is obliged to provide sufficient grounds to justify the action continuing to trial, the burden in summary judgment applications under the originating summons procedure is on the plaintiff to justify its entitlement to summary judgment. However, once this is prima facie demonstrated on the evidence, it is then up to the defendant to show that he does have a defence or defences to the claim. In this way, there may in practice be little difference between an application for summary judgment in originating summonses and an application for summary judgment under RHC, Order 14. See Wing Hang Bank Limited v Liu Kam Ying & anor (unrep, HCMP 2519/2001, 6 March 2002) §10, Ma J (as he then was).

15.  The Plaintiff’s written submission concedes that if the Defendants can show there are factual issues which cannot be resolved on the affirmations, then a trial is inevitable: §57.

D. ISSUE 1: WHETHER THE PLAINTIFF WAS A MONEY LENDER AND HENCE HAVE TO COMPLY WITH ORDER 83A

16.  Where a money lender, as mortgagee, seeks to enforce a mortgage by action, he has to follow the procedure under Order 83A of the RHC in addition to Order 88.

17.  “Money lender” in Order 83A, rule 1(2) has the meaning assigned to it by section 2 of MLO, which means every person whose business is that of making loans but does not include any person who makes a loan specified in Part 2 of Schedule 1.

18.  Part 2 of Schedule 1 lists out “exempted loans” and it includes, in paragraph 2, a loan made to a company secured by a mortgage or charge registered under the Companies Ordinance, Cap 622.

19.  In the present case, there is no dispute that the Plaintiff held a valid money lender license at the time the Mortgages were entered into and still holds one; and that the Plaintiff lent money to the Defendants secured by the Mortgages as part of the Plaintiff’s money lending business. There is also no dispute that the Defendants were/are companies incorporated in Hong Kong and that the Mortgages have been registered under the Companies Ordinance.

20.  Accordingly, the Plaintiff does not fall within the meaning of “money lender” and does not have to comply with Order 83A.

21.  As a note on practice, a licensed money lender who considers that what he seeks to enforce is an exempted loan under Schedule 2 of MLO and hence does not have to comply with Order 83A, he should state these expressly in his originating document (writ or originating summons), supported by documents. This will avoid wastage of the Court’s time in raising requisitions as to why the money lender does not follow Order 83A.

22.  Practitioners should take note also of Order 41, rule 1(2) which provides that “where a cause or matter is entitled in more than one matter, it shall be sufficient to state the first matter followed by the words ‘and other matters’, ...” In the present case, the title pages and back sheets to affirmations covered 5 pages, which were wholly unnecessary if rule 1(2) were complied with.

E. ISSUE 2: WHETHER THE INTEREST PROVISIONS ARE UNCONSCIONABLE IN NATURE

23.  Sections 24 and 25 of MLO govern all lenders, whether a money lender or not. Section 24 prohibits excessive interest rate which exceeds 60% per annum. Section 25 permits the court to reopen a transaction where there is evidence that the transaction is extortionate.

24.  For the purpose of section 25, a transaction is extortionate if it requires the debtor to make payments which are grossly exorbitant or it otherwise grossly contravenes ordinary principles of fair-dealing.

25.  Where the effective rate of interest under an agreement exceeds 48% per annum, that fact alone shall be presumed for the purpose of section 25 to be a transaction which is extortionate.

26.  The fact that the interest is compounded or capitalized is not in itself evidence that the provision as to the default rate amounts to a penalty, and is a common requirement of the larger licensed banks. The Court looks at the rate itself, not by what is now owing by the defendant as a result of his failure to pay. The Court asks whether the penalty rate is so high that it amounts to a penalty. An increase in the rate of interest upon default will not be classified as a penalty provided that it is not retrospective and not excessive. See South China Strategic Ltd v Celsion Corporation, HCA 9963/2000, 7 August 2001, §§8-10, DHCJ Woolley.

27.  DHCJ Woolley did not consider it appropriate to look at the percentage increase alone, but the resulting rate and then in commercial terms. In South China Strategic Ltd, default interest was charged at 2% per month compounded monthly, which made the annual rate 26.8% (§13). DHCJ Woolley did not regard that rate as extortionate or excessive.

28.  In the present case, the default rate is only 12% per annum compounded on the Unpaid Sum, even lower than the rate in South China Strategic Ltd. Further, the default rate does not have retrospective effect. In no way can it be regarded as extortionate, excessive or unreasonable. In my view, there is no justification for considering section 25 of MLO.

F. ISSURE 3: WHETHER THE INTERESTS ARE PENALTY IN NATURE

29.  Mr Singh, counsel for the Defendants, submits that the interest provisions are in the nature of penalty and are not genuine pre-estimates of loss. Whether they are penalty in nature is fact sensitive and should be tried. He relies on the case of Lei Shing Hong Credit Ltd v Accufast Ltd, HCMP 1749/2014, 23 March 2016, Anthony Chan J, §§37-38; and Lei Shing Hong Credit Ltd v Kingsfine International, HCMP 1169/2016, 21 April 2017, DHCJ Paul Lam SC, §§23-24.

30.  The modern inquiry is no longer subject to the distinction between a penalty and genuine pre-estimate of loss. The court should first identify the legitimate interest of the innocent party that is being protected by the clause, and then assess whether the clause is out of all proportion to the legitimate interest by considering the circumstances in which the contract was made. Legitimate interest can be in the performance of the contract or some appropriate alternative to performance that goes beyond compensation. Notions of whether the clause has a deterrent purpose or whether it is a genuine pre-estimate of loss would be subsumed by the broader enquiry into the legitimacy of the interest that supports the provision. Law Ting Pong Secondary School v Chen Wai Wah [2021] HKCA 873, 11 June 2021, §§4-5 & 69 (Lam VP and Chu JA), following Cavendish Squak Holding BV v Makdessi [2016] AC 1172, §32.

31.  The doctrine of penalty is not applicable to a contractual provision which stipulates a primary obligation to pay certain amount of money. A clause can only be a penalty if, it is a secondary obligation triggered by a breach of a primary obligation. The penalties doctrine is a rule for controlling remedies for breach of contract that should not be transformed into a jurisdiction to review the content of the substantive obligations which the parties have agreed at: Law Ting Pong, §§4-5, 69-71.

32.  On the question of penalty interest, in judging what is extravagant, exorbitant or unconscionable, the extent to which the parties were negotiating at arm's length on the basis of legal advice and had every opportunity to appreciate what they were agreeing must at least be a relevant factor: Bank of China (Hong Kong) Ltd v Eddy Technology Co Ltd [2019] 2 HKLRD 493, §§3 & 8, applying Cavendish, §§152 & 35.

33.  Whether the interest rates were extravagant, unconscionable or incommensurate with any legitimate interest is for the party in breach to show: Cavendish, at §143.

34.  Accufast concerned a service charge of 4% per month, meaning 48% per year (if not compounded) and close to being presumed extortionate under section 25 of MLO. Likewise, Kingsfine involved a service charge of 4% on a day to day basis, meaning an illegal rate under section 24 MLO. The facts of these 2 cases are far removed from the present one.

35.  Applying the legal principles in this section, the Court has no power to review the primary interest provision of 10%.

36.  As for the default rate of 12%, it is legitimate to deter late payment of the loan in this refinance arrangement. The additional 2% interest rate cannot be said to be disproportionate to the legitimate interest of the Plaintiff, still less can it be regarded as extravagant or unconscionable. Both parties were legally represented, with time to consider the loan documentation. The 12% cannot be said to be of a penalty nature.

G. ISSUE 4: OTHER REASONS SHOWING UNCONSCIONABILITY AND UNREASONABLENESS

37.  For the sake of completeness, I have taken into account paragraph 26 of the written submission of Mr Singh. In summary, he puts forth the following arguments:

(1) Unequal bargaining power between the parties;

(2) Great financial pressure on the Defendants to accept the interest terms;

(3) The Defendants did not receive legal advice on the Facility Agreement and Mortgage;

(4) The interest rate was considerably higher than the market rate indicated by HIBOR; and

(5) The Plaintiff has never explained the high default interest rate which was compounded.

G1. Unequal bargaining power

38.  Mr Singh submits that the Plaintiff had the upper hand with far greater resources and dictated the terms to the Defendants.

39.  With respect, a lender having far greater resources is a common feature in commercial lending. It cannot, without more, give rise to unconscionability.

40.  In any case, the Plaintiff did not dictate the terms to the Defendants. At least SSA had consulted Norton Rose. At least the term of default interest had been reduced from the initial 20% suggested in the Plaintiff’s draft Facility Agreement to 12% in the signed version. The Defendants had the opportunity to consider the draft for one month before signing.

G2. Great financial pressure on the Defendants to accept the interest terms

41.  The Defendants claimed to have great financial pressure to accept the interest rate provisions, as their former loans with banks were coming to an end on 1 March 2018 without extension. If refinance was not arranged, immediate legal action would be taken by the banks against the Defendants.

42.  With respect, the great financial pressure was not caused by the Plaintiff but the former lenders and the Defendants’ lateness in seeking re-finance. The Defendants had started looking for refinance in mid-January 2018. They had had another month for Norton Rose to consider the draft Facility Agreement.

G3. Defendants did not receive legal advice

43.  The Defendants’ arguments can be broadly classified as follows:

(1) They first claimed that Norton Rose was only a witness to the Facility Agreement and Mortgages but later claimed that the firm only represented SSA as a guarantor but not the Companies. None of the emails exhibited had been sent to the Defendants nor copied to the directors of the 1^st to 3^rd Defendants. Norton Rose did not go through or explain the Facility Agreement, Mortgage, Guarantee or the interest provisions.

(2) None of the 3 guarantors to the Facility Agreement were directors of the 1^st to 3^rd Defendants when the Facility Agreement and Mortgage were signed on 23 April 2018.

(3) Norton Rose was only given the Facility Agreement, Guarantees and Share Charges but not the Mortgages to comment on. Norton Rose had commented in an email to the Plaintiff that the Facility Agreement contained “many more provisions and restrictions” for a “small loan size and short tenor”. It highlighted the heavy handed nature of the agreement from the Plaintiff for a simple loan. Norton Rose could not review or properly understand the full liabilities of the Mortgage before advising any party.

(4) At the meeting of 13 March 2018, there was no mention of any default interest rate, compound interest being chargeable or the arrangement fee of HK$2,250,000.

44.  With regard to argument (1), the Defendants’ initial case was that Norton Rose was only a witness to the Facility Agreement. The Defendants’ affirmations said that they did not receive legal advice but never denied that Norton Rose represented them in the loan transaction.

45. Further,

(1) SSA signed a Term Sheet of the loan proposed by the Plaintiff “on behalf of the Defendants”. He introduced “the Defendants” and “the history of the Defendants” to the Plaintiff.

(2) SSA referred to Norton Rose as “our lawyers” in an email on 14 March 2018 and asked to confirm with the Plaintiff that the draft loan agreement would be ready and would be passed to “our lawyers at Norton Rose”.

46.  Norton Rose in fact had commented on the draft Facility Agreement as evidenced by the marked-up versions exchanged with the Plaintiff through emails on 22 March 2018, subject to further comments from their client. Norton Rose had expressly queried the need for such elaborate loan documentation for a small loan size and short tenor. The default rate was reduced from 20% to 12% in the final version of the Facility Agreement.

47.  Further, SSA/Norton Rose had had about one month since the draft Facility Agreement was given to them to negotiate the terms. It was incredible that SSA would have kept the documents to himself and the Companies suddenly signed the Facility Agreement and Mortgages without knowing the contents.

48.  Assuming I am wrong, the net position was that the Companies had executed the Facility Agreement and the Mortgages without independent legal advice. That was not sufficient, in itself to justify the Court re-opening the loan transactions because borrowers do not seek legal advice for various reasons. This was not a case where one Company used properties of other Companies as collateral. There was no suggestion of eg undue influence, or that the Companies were not aware of what they were signing. The loan was advanced to each of the 4 Companies jointly and severally. It was up to each Company to seek legal advice without the need for a reminder from the Plaintiff.

49.  With regard to argument (2), that the guarantors were not directors was irrelevant. The Plaintiffs are not suing the guarantors. There is no legal requirement that guarantors need to be directors of the borrower company. The directors of the 1^st to 3^rd Defendants are not suggesting that they had not signed the Mortgages.

50.  With regard to argument (3), I have asked Mr Singh what term, in the Mortgage, was not in the Facility Agreement. He could not identify any. Even if Norton Rose did not discharge their duty in going through or explaining the documents before the Defendants executed them, the Plaintiff could not be blamed as it was not the Plaintiff who instructed Norton Rose.

51.  With regard to argument (4), terms not mentioned at the 13 March 2018 meeting were included in the Facility Agreement. Again it was the duty of Norton Rose to explain to the Defendants or, if Norton Rose was not instructed to act for the Companies, the Companies were still bound by the terms as no vitiating factors could be shown. Besides, SSA had 2 financial brokers to guide him.

G4. Interest rate higher than market rate indicated by HIBOR

52.  There is no dispute that the interest rate and default interest rate under the Facility Agreement were higher than HIBOR. However, HIBOR was an interbank rate. There is no evidence that the parties ever used HIBOR when discussing interest rates or in the Facility Agreement. Mr Singh’s true complaint was the same as under G5 below.

G5. No explanation for default interest rate and compound interest

53.  Mr Singh submits that the Plaintiff had no explanation for the 20% default interest rate which was reduced to 12%, and the charge of compound interest, when the loan was already secured over 4 properties and 3 guarantees.

54.  With respect, this is a non-starter. Interest rate and whether it should be compounded were matters for commercial negotiation and not for explanation when the lender came to enforce the loan agreement/mortgage. Any duty to explain rested on Norton Rose and not the Plaintiff.

G6. Findings

55.  In summary, none of the defences raised, taken individually or collectively, are meritorious. The interest provisions are not unconscionable or penalty in nature.

56.  As demonstrated by its evidence, the Plaintiff is plainly entitled to summary judgment. Not being a money lender within the meaning of section 2 of MLO, the Plaintiff was not caught by section 22 of MLO. It can charge default interest and compound interest on the Unpaid Sum. I am satisfied from the Plaintiff’s computation (which is undisputed) that the following amount was owed by the Defendants as at 21 January 2021:

Description of debt	Amount
Principal	HK$90,000,000.00
Accrued Interest	HK$9,024,657.53
Default Interest	HK$21,703,408.14
LESS: Partial payment of Accrued Interest and Default Interest	6,108,985.00
	HK$114,619,080.67

The daily default interest from 28 January 2021 shall be $37,682.99.

57.  The default interest can also apply post-judgment until actual payment is made: Clause 8.3 of the Facility Agreement. Mr Singh submits the Plaintiff did not seek interest in Originating Summons. With respect, he has overlooked paragraph 1 of the Originating Summons which expressly prays for payment of interest at such rates as are applicable under the terms of the Facility Agreement.

H. ISSUE 3: TIME FRAME FOR DELIVERY UP OF VACANT POSSESSION

58.  4604, 4605 and 4210 Apartments are occupied by the 3 guarantors’ families. Occupation as regards 4606 is unknown.

59.  For residential properties, the usual order is for delivery up of vacant possession within 4 weeks. Mr Singh claims that the guarantors are not in Hong Kong and he asks for 4 months for them to come back and deliver vacant possession.

60.  There is no proof that the guarantors are not in Hong Kong, although there is some evidence to show that SSA travelled between Hong Kong and London, as evidenced by his 4^th affirmation. Without further evidence, I give an order for 4 weeks to deliver up vacant possession, with liberty to apply.

I. COSTS

61.  Costs should follow the event and be paid by the Defendants to the Plaintiff. According to Clause 18.1(b) of the Facility Agreement, the Plaintiff is entitled to all reasonable expenses (including legal expenses on solicitors and own client basis) incurred in suing for any sum due from the Defendants in connection with the enforcement of the Mortgages.

62.  Even so, the contractual provision cannot fetter the Court’s discretion on costs, although in the normal course the Court would be slow to disturb the parties’ agreement unless the circumstances provide otherwise: Bank of China (HK) Ltd v Twin Profit Ltd (2012) 15 HKCFAR 560.

63.  The Plaintiff asks for taxation of costs on the basis that it is entitled to costs on solicitor-client basis. However, this is a simple application.  Summary assessment can be used even for costs on solicitor-client basis.  The taxing master’s time should not be wasted.

64.  That said, for the following reasons, the Court would reduce/disallow some costs of the Plaintiff:

(1) No costs statement was provided in accordance with paragraph 7 of PD 14.3 until this Court asked for it; and even though the Court gave indulgence, the costs statement was still served after the designated time;

(2) Despite express directions by this Court, there has not been double sided printing of bundles to save paper; and

(4) There was inclusion of unnecessary documents despite express directions of this Court. For example, there was no need to include four 1^st affirmations of SSA when the contents were the same save as to the names of Defendants.

65.  Although there are 4 sets of proceedings, there is a lot of duplication in contents as the claims are based on the same Facility Agreement and Mortgages of the same terms.

66.  For the reasons given in this section, I make an order nisi that costs should be paid by the Defendants to the Plaintiff on solicitor-client basis, summarily assessed at $240,000, to be borne severally by the 4 Defendants.

J. CONCLUSION

67.  With regard to the 3 issues set out in paragraph 6, I hold that

(1) The Plaintiff was not a money lender and did not have to comply with Order 83A in this case. However, practitioners ought to take note of what is stated about money lenders suing on an exempted loan in paragraph 21 above;

(2) The default interest provisions are not unconscionable or penalty in nature; and

(3) There shall be 4 weeks for delivery up of vacant possession.

68.  I order as follows:

(1) With regard to the Order 88 Action,

(a) There shall be money judgment to the Plaintiff in the sum of HK$114,619,080.67, with daily interest at HK$37,682.99 from 28 January 2021 to the date of judgment and thereafter at simple rate of interest at 12% per annum on HK$90,000,000 until payment;

(b) The Defendants shall deliver up vacant possession of the Properties within 4 weeks from the date of this judgment; and

(c) There be liberty to apply;

(2) I grant leave to the Defendants to file the four 1^st affirmations of SSA out of time in respect of the Time Summons;

(3) I dismiss the Conversion Summons; and

(4) On a nisi basis, there be costs to the Plaintiff on all the summonses on solicitor-client basis, summarily assessed and allowed at $240,000, to be borne equally and severally by each Defendant.

69.  I thank Mr Singh and Mr Chan for their assistance.